Commentary

Deal of the Century- By Greg Strid

I read a distressing tale in the Star Ledger yesterday.
The article discussed the price-slashing that Red Bank,
New Jersey-based homebuilder Hovnanian engaged in
during its “Deal of the Century” blow-out sale in October.
It is common knowledge that the real estate market is
in a slump, and Hovnanian slashed prices on its cavernous
homes by as much as $100,000 to boost sagging sales.

The Armageddon-style sale appeared to work- over
2,100 contracts were signed during the three day
span. But, this flashy stunt did not save Hovnanian
from reporting a 10 percent drop in quarterly new
home orders. The Star Ledger reported that more
than half of the recent quarter’s orders came from
this one long super-sale weekend. And, cancellations
have been on the rise. Company officials attribute
this to the tightening of mortgage lending standards.

The significance of this story lies in the fact that
homebuilders like Hovnanian have over-built, over-
borrowed and are in a mad rush to liquidate excess
inventory. They are now facing increasingly hostile
market conditions at the worst possible time.

Just as homebuilders are attempting desperate
measures to restore order to inventory levels, the
mortgage lenders- having been burned by souring
subprime loans- are sobering-up and requiring
more than just a pulse in order to qualify for a loan.

The nation-wide inventory of unsold homes now
represents 13 months of supply at current sales
levels. (This is up significantly from 7 months in
March and 10 months in August.). As inventory
levels rise, and homebuilders are reduced to ever
more desperate price-slashing measures, the market
value of existing homes will fall as well. And, this has
caused the power to set prices to shift from seller to
buyer.

The cycle of boom is turning to bust. Over-investment
has spawned reckless levels of debt among homebuilders
and the general public. It also created a level of supply
that the market cannot support. Tougher lending standards
are now becoming a hurdle that many prospective buyers
cannot surmount. And, qualified buyers now know that all
they have to do is wait.

© Greg Strid 2007

© 2007 Splendid Marbles.